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Congressional Panel Condemns AIG Tax Break

Source: WSJ - Erik Holm

Posted on 13 Mar 2012

Former members of a congressional panel that oversaw federal bailout spending decried on Monday a years-old Treasury Department determination that allows American International Group Inc. and other companies to avoid paying billions in taxes.

The benefits at issue were accrued by AIG as it amassed record losses amid the financial crisis; the U.S. tax code allows businesses to "carry forward" such net operating losses to offset future tax obligations, in effect saving on future tax bills. But those carry-forwards can vanish if a company is taken over or sold, an exception that prevents healthy companies from avoiding taxes by buying firms with significant losses.

The criticism from the former members of the congressional panel stems from a series of Treasury determinations beginning in late 2008 that said the federal government's bailout of struggling firms didn't constitute a sale. The rule allows companies like AIG, General Motors Co. and Citigroup Inc. to hold tens of billions of the so-called deferred tax assets on their books for future use if results improve.

Four members of the now-disbanded Congressional Oversight Panel, led by former chairman Elizabeth Warren, said the Treasury ruling amounted to a "stealth bailout" and called on Congress to act to prevent AIG from taking advantage of it. The panel was formed in 2008 to monitor the government's Troubled Asset Relief Program; it disbanded last year.

Ms. Warren, in a conference call with reporters Monday, said she objected to the use of such tax benefits by other bailed-out companies in addition to AIG. "The principle applies across the board," she said.

The Treasury's decision at the height of the financial crisis "wasn't necessary to protect the economy," Ms. Warren said. "We think it's time for Congress to end the special tax break." Ms. Warren is now running for a U.S. Senate seat in Massachusetts.

The criticism of the Treasury decision comes weeks after AIG reported a $19.8 billion fourth-quarter profit that was fueled by a $17.7 billion accounting gain from the tax benefits. At one point, the Treasury owned more than 90% of AIG. That has since fallen to about 70%, and the government plans to sell the rest of its stake over time to recoup roughly $37 billion in federal aid.

The Treasury this month said the tax provision "originally was intended to prevent trafficking in tax losses" by private companies and didn't apply to companies in which the government ended up owning a majority stake as a result of a bailout.

"It would have been counterproductive—and perhaps irresponsible—to undermine the stability of those same institutions, at the height of the financial crisis, by imposing a tax code provision that was never intended to apply in this context," the Treasury said. The federal government "is not a taxpayer and has no interest in sheltering taxable income."

Another former member of the committee, Damon Silvers, said on a conference call with reporters Monday that the tax rule causes "substantial amounts of money—billions of dollars—[to leak] out to the benefit of private parties who really should not be benefiting from public policy in this way."

The rule also can cause "an artificial inflation of executive compensation," since companies can tie the pay of top employees to profits, Mr. Silvers said.AIG spokesman Mark Herr said the company "is adhering to well-settled tax law that a company can use losses to offset its income.

"More important, AIG has repaid the American taxpayer more than $45 billion to date and is committed to taking all possible steps so that American taxpayers can continue to recoup their investment in AIG at a profit," Mr. Herr said.